J.P. Morgan Chase
Chief Marketing Officer Kristin Lemkau joined a meeting in May of some 25 marketing executives at Manhattan’s Millennium Broadway Hotel to hear a confidential presentation on the disturbing state of the advertising business.

Corporate investigations firm K2 Intelligence revealed that a seven-month probe it conducted had uncovered that ad agencies are getting rebates from media companies in the U.S., but these firms aren’t telling their clients or passing along the savings, according to several people who attended the meeting.

That prompted Ms. Lemkau to launch an audit of J.P. Morgan’s ad buyer and temporarily halt the agency’s work on the bank’s $250 million annual ad-buying account, according to people familiar with the matter. ​

She is one of a number of marketers scrambling to respond to K2’s probe, which was done on behalf of the Association of National Advertisers, a trade group. The report, released in early June, detailed a range of practices including rebates, the fogginess of prices agencies pay for inventory, and conflicts of interest arising from agencies’ investments.

General Electric Co.
recently sent a letter to its agencies alerting them it had hired outside counsel to conduct an audit because of the ANA report, according to people familiar with the matter.
Sears Holdings Corp.
, and Nationwide Mutual Insurance Co. also are auditing their agencies, according to people familiar with the situation.

The ANA report also exposed the holes in many agency contracts, which marketers are now trying to plug.
AT&T Inc.,Allstate Corp.
,
Walgreens Boots Alliance Inc.,
Fidelity Investments, Heineken USA and
U.S. Cellular Corp.
are among those trying to get more liberal auditing rights such as the right to audit individual divisions of the holding company or tougher language in new contracts with their agencies, people familiar with the matter said.

The revelations have strained trust between marketers and agencies in the nearly $540 billion global ad marketplace.

“There is trouble in paradise in this industry and anybody that says there is not has their head in the sand,” said a chief marketing officer at one of the largest companies in the U.S. “The thing to do is trust but verify.”

The ANA report didn’t name companies alleged to have engaged in nontransparent practices. K2 said in the report that some of the activity it discovered was permitted under the contracts agencies and marketers have. The investigators said determining whether U.S. laws were violated was outside its scope. The big ad-agency holding companies, including
Publicis,WPP
PLC,
Omnicom Group Inc.
and
Interpublic Group of Co
s., have been on the defensive, and have asked the ANA to provide information related to their specific agencies.

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The controversy spotlights how complex and opaque the ad business has become after two decades of mergers that produced a handful of giant companies with hundreds of firms under their umbrellas. Although the industry is best-known for its creative prowess—glamorized in the TV series “Mad Men”—it is the media-buying business that has been the most profitable for ad conglomerates.

Over the past few years, as clients have pushed to cut agency fees, ad companies expanded aggressively into new businesses such as principle buying, in which ad firms use their own money to buy ad time and then resell it to their clients. They also built and acquired companies that specialize in automated ad buying and use technology and data to buy targeted digital ads across the web.

These changes have made it more difficult for marketers to track how much they are paying for ad space across media platforms, partly because some of those new companies don’t disclose ad pricing to the marketers that sign up to use such services.

“The reality is that the holding companies are so large, interconnected and incestuous that it is very easy to have very little transparency in that world,” Joe Tripodi, chief marketing officer of Subway, which is incorporated as Doctor’s Associates, said in an interview last year.

After the ANA report was released, Ms. Lemkau called Steve King, a top executive at Publicis, whose Zenith Media unit handles the bulk of J.P. Morgan’s media buying. She told him the bank was conducting an audit and putting the agency’s business on hold until the audit was complete, according to people familiar with the matter. Business Insider earlier reported J.P. Morgan’s audit.

During the call, which was friendly in tone, Ms. Lemkau said she had an obligation to the bank to find out the facts, while Mr. King said the company was eager to clear its name and pledged full cooperation with the audit, one of the people familiar with the situation said.

“We have to find out the facts in our case,” said Patricia Wexler, a J.P. Morgan spokeswoman. Ms. Wexler said that Zenith has been “cooperative” with the process.

“Audits are a part of normal course of business,” Publicis Groupe said. “As always, we have been collaborative on the client audit process and expect a satisfactory conclusion.”

A few weeks after the call, Ms. Lemkau gave Zenith back some media-buying duties, allowing the firm to handle TV buys for the fourth and first quarters, one of the people said.

There have been hiccups in the auditing process. After weeks of negotiations, Publicis agreed to allow J.P. Morgan to see additional information later this month but won't allow the bank’s auditing firms to be present, said people familiar with the matter.

Ron Amram, vice president of media marketing at Heineken USA, said advertisers need to know far more about the intricate arrangements ad agencies have with internet companies. They pay the tech firms for ad space but also receive technology services from them, Mr. Amram said.

To follow the money nowadays, he said, “you don’t need a generalist anymore; you need a proctologist.”

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